Arbitrage Magazine - April 2020 - Finance & Investment Club | IIM Rohtak

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April 2020 Vol 4 Issue 2

The New Economy- How the Labour side of the

Article of the month-

economy will be impacted in the post Covid-19 world?

Special Mention-

Uncovering the state of India’s financial sector

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INDEX

S.No.

1

Article

The new economy- How the labour side of the economy will

Page No.

3

be impacted in the post Covid-19 world?

2

Uncovering the state of India’s financial sector

8

3

Current state of Indian Economy

11

4

Can India become a global manufacturing capital?

15

5

The Indian Financial market meltdown- It’s not just the coronavirus

18

6

Increasing Anti-Globalization sentiment in Larger Economies of the world

24

7

CORONABONDS: Road to solidarity or Disharmony?

27

8

Whether bailout of banks is the only solution?

30

9

The realm of Gig Economy: Understanding the new normal

36

10

Discussion on Economic theories with the background of

38

current crisis in Oil and Gas Industry 11

Yes Bank to No Bank

41

12

The sags of negative interest rates

44

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The New Economy – How the Labour side of the economy will be impacted in the post Covid-19 world?

By: Abhijat Das (DPS Hyderabad)

Everyone in the world is scrambling to find a way out of the Covid-19 crisis by taking adequate precautions or experimenting the usage of some game changing Covid-19 medicine or a vaccine. The world post Covid19 will be changed forever. A new consciousness will have developed in the world towards better public health and safety. This article provides a holistic view of how the labour side of the economy will look like: their work environment, workplace and how institutions plan to bring back normalcy in the post Covid-19 world.

Source 1: https://www.netscribes.com/the-economic-impact-of-covid-19-across-the-globe/

Organizations and industries around the world are conjuring up unique approaches to revive themselves amidst gloomy, bleeding economies. A survey conducted by the Center for Monitoring Indian Economy Pvt Ltd (CIME) revealed that the unemployment rate has jumped to 23% after the lockdown came into effect in the last week of March and it’s at its highest point since 2016. The prospects and revival measures by different sectors are listed as follows.

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The IT Sector: India’s largest IT service provider, Tata Consultancy Services (TCS), has proclaimed that they will, running up to 2025, ask 75% of their 4.48 lakh employees globally (including 3.5 lakh in India) to work from home.

They believe that the move, known as 25/25 will require significantly less office space than their current occupancy. The move came after TCS swiftly moved 90% of its 4,48,000 employee’s post-lockdown to an operating model known as Secure Borderless Work Spaces (SBWS). In a letter to its employees, the TCS CEO and MD, Rajesh Gopinathan stipulated that SBWS had seen 35,000 meetings, 406000 calls, and 340 lakh messages across TCS using the SBWS platform. TCS has been evolving SBWS over the past few years. "We have come out stronger and our model is more proven than ever before," TCS's CEO and MD Rajesh Gopinathan was quoted as saying.

Many companies are expected to follow a similar model to reduce costs and embrace the situation. Countries throughout the world have begun to relay guidelines and models for their employees to follow in the future.

All of this comes as measures to prevent future lay-offs and pay cuts. Zee entertainment and Sun TV witnessed a decline of 28% and 20% in ad revenues from January to March. Also, technology majors like Tata Consultancy Services (TCS), Infosys, HCL Technologies have decreased their hiring by 9% in March. OYO Hotels and Homes has cut down its workforce by 16% (4000 employees) in its domestic and international offices. Ola laid off 8% of its workforce, Quickr has let go of 900 employees during the lockdown.

The transport sector: One of the primary victims of the pandemic is the transport sector, from taxis to airlines, everything has been affected economically due to the pandemic. There is a surge in demand for truck drivers transporting essential goods while most other forms have been stagnant. Plenty of entities in the transportation sector are beginning to adapt to different demands. The American Airlines, along with a few other related groups have converted many passenger flights into cargo flights to carry different necessary goods such as medicines and office cargo.

In India, freight train services have been ramped up to meet the demand for essential commodities. However, in spite of these developments, the future of the transport sector, public transport in particular, looks bleak.

The perceived risk involved with travelling in crowded places such as public trains, buses and auto rickshaws may lead to many shifting to personalised travel modes. That being said, the transport sector employs millions of people, and it is necessary to ascertain the consumer preference and future demand for these services.

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The construction sector: Unlike the financial services, retail, manufacturing or IT sectors, the construction engineering sector is required to have a large workforce at all times, consisting of both skilled and unskilled labour. The construction industry experiences a slowdown during the monsoon period, and summer is considered to be ideal for maximum productivity. The industry employs over 49 million people, almost 12 percent of the country’s population. The Indian government’s plan to become relies heavily on the development of critical infrastructure under the national Infrastructure plan.

A study conducted by the KPMG asserts that 59000 crore worth of projects are under development in India, most of which is expected to be impacted severely due to the pandemic. The study states that one of the largest construction company in the country is spending about Rs 15 crore per day to provide support for 2.3 lakh labourers staying at labour camps. They are being provided with food and basic amenities, wages, sanitation and medical facilities. The study asserts that the industry should follow a three-pronged approach towards the revival of the sector: 1) Enhancing the labour safety norms 2) Strengthening project governance 3) Leveraging business continuity planning.

Additionally, the Ministry of Labour and Employment, in order to support unauthorized construction workers, has issued an advisory to all State heads to transfer funds in the account of the construction workers from the cess fund collected by the Labour Welfare Boards under the Building and Other Construction Workers Welfare Cess Act, 1996.

The manufacturing sector: The manufacturing sector is one of the most important areas of the GDP, contributing nearly 17% in 2019. An estimation by the United Nations Conference on Trade and Development stipulates that the outbreak may cause the global FDI to shrink by 5%-15%. Most workers across the country have returned to their home states and manufacturing activities are not expected to take off as soon as the lockdown restriction ends. Industries such as the automobile industry, textile industry and engineering industry are heavily reliant on migrant

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workers for the functioning of their plants. These workers will require time to get back to their workspaces as inter-state and inter-city transport is heavily curbed. There are concerns whether the transportation facilities are adequate to bring back all the workers back to the cities after the lockdown restrictions are removed. On April 13th. India’s central trade union proposed for an amendment to the FA Act, to allow workers to work 12hour shifts, 6 days a week. This move has garnered negative feedback, considering the fact that the ILO mandates 48-hour work weeks. This move, aimed at reducing workforce and costs, will lead to increased fatigue among the workers and decreased work-life balance.

The retail and hospitality sector: The clothing, restaurant, and grocery retail industry is expected to take a year to recover, according to top industry associations. Apparel manufacturing industry has 12 million employees with 7 million in the domestic sector while retail as an industry has 46 million employees out of which 6 million are in modern retail. The key to recovery of this sector lies in selling the piled-up inventory as soon as outlets reopen followed by increasing the number of units per machine at factories.

Lay-offs and salary cuts have severely impacted the hospitality sector. With social distancing becoming the new norm, less people are expected to visit crowded places. Mass exodus of the 7.3 million people employed in the restaurant sector could lead to further delays.

Conclusion:

Source 2: Source: 1) IMF World Economic Outlook, April 2020 2) IMF World Economic Outlook, April 2020 3) Statista, Bain & Company, World Travel & Tourism Council, Sea- Intelligence, Juniper Research 4) TrendForce, Mar, 202

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The future job prospects will be impacted heavily in the post Covid-19 world. The new economy will see plenty of changes, some for the better, and some for the worse. Economies in Asia other than China are expected to see a growth in manufacturing jobs in the long run, remote and digital working will become the new normal, salaries may become unfixed, and new jobs of different kinds will be created. Institutions all over the world are taking stringent measures to bring back normalcy.

References: 1) https://home.kpmg/content/dam/kpmg/in/pdf/2020/04/reviving-the-construction-sector-postcovid-19.pdf 2) https://economictimes.indiatimes.com/news/international/business/what-returning-to-workwill-look-like-in-offices-cafes-and-factories-around-theworld/articleshow/75215529.cms?from=mdr 3) http://www.mondaq.com/india/operational-impacts-and-strategy/921132/faq39s--impact-ofcovid-19-on-labour-and-workforce 4) https://www.teriin.org/article/effects-covid-19-transportation-demand 5) https://nenow.in/opinion/boosting-indias-manufacturing-prowess-post-covid-19-crisis.html 6) https://www.moneylife.in/article/solutions-for-reviving-indias-manufacturing-sector-lie-in-

undoing-government-policies/31341.html 7) https://economictimes.indiatimes.com/industry/services/retail/covid-19-impact-food-and-fashionretail-will-take-a-year-to-revive-predict-top-industry-associations/articleshow/75127223.cms?from=mdr

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Uncovering the state of India’s financial sector By: Anjali Agarwal (TAPMI) The global outburst of the COVID-19 pandemic has put an end to some de facto relationships, such as reducing countries’ reliance on America, and shifting the geopolitical paradigm towards the Eastern economies. It has revealed that the infrastructural facilities available are futile until and unless the countries are efficiently utilizing them. China is supplying materials to all the countries today, even though it is interpreted as a political propaganda. Time has truly tested the priorities of governments when it comes to choosing between the economy and the lives of the humanity.

India has taken a commendable stance by enforcing the strictest and longest lockdown ever witnessed by any country. It has even surpassed developed countries like Italy and China. However, this alone will not ensure the success story of India.

India’s fiscal balance of both the center and the state stood at -7.4% in FY 20. The Government is already dealing with a debt heavy balance sheet. Nonetheless, it has made the undaunted decision to provide a financial stimulus package worth approximately 3% of our nation’s GDP, to ease the economic burden of the epidemic.

Presently, only a handful of industries have been left unscathed by the crisis – the Insurance sector, the Healthcare sector, and the Telecom sector. In order to prepare the country for the post-pandemic situation, there needs to be a cleansing of the current financial services situation in the country, as this would have the most significant role in normalizing the economy when the lockdown ends.

In its attempt to do just that, the RBI introduced a slew of measures to provide relief to the financial sector, paying special attention to NBFCs and NBFC-MFIs. In India, NBFCs indisputably play a quintessential role in the financial inclusion vision of our Prime minister. However, the liquidity crunch faced by NBFCs has long haunted our economy, ever since the IL&FS crisis broke out in September 2018. Post the turmoil; banks have been wary of extending credit to this shadow-banking member. Moreover, the current wave of measures also proves to be inadequate in solving the liquidity problems that are being faced by this segment. The RBI has introduced a moratorium period of 3 months as a relief to the borrowers. This is problematic for NBFCs as they have no option but to grant this moratorium as most of their repayments take place in liquid cash, which currently isn’t feasible. However, flipping the coin, banks have not passed an order to grant this same moratorium to NBFCs. This situation leads to NBFCs not receiving any payments but yet having to make payments. They are also borrowers from mutual fund houses (MFs) and MFs have also been constantly reducing their exposure to NBFCs. As per a Credit Suisse Report, Fund houses have reduced their exposure to NBFCs by as much as 14% in March 2020 alone.

The micro finance institutions (MFIs) are another valuable segment of this sector. As per the data collected from SIDBI, the MFIs have been responsible for extending credit to 64 million individuals, who fall outside the reach of traditional banking. They have provided a rock-solid support to low income families and boast a loan portfolio of USD 1.785 trillion as on November 2019. They will play an even more significant role post the lockdown as a number of individuals from tier 2 and tier 3 cities are dependent on these MFIs.

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The Covid-19 crisis is posing a tough time for MFIs because the current lockdown has hit the vulnerable section of the society the most, and this section happens to be the customer base of MFIs. Hence, loan repayments are a far-fetched dream for these institutions. Moreover, MFIs employ around 2 lakh people who are primarily involved in field visits. Hence, one of the major concerns of high operational cost persist, as they cannot cut down the salary of individuals who are connecting these institutions to their borrowers. The acquisition of customers by MFIs happens mainly through door-to-door strategies and maintaining personal touch with customers. Therefore, unlike banks and big NBFCs who can expand their loan book even during a lockdown by leveraging their tech-savvy target group, MFIs don’t have that option. A majority of the small and mid-sized MFIs borrow from NBFCs, which are further dependent on banks, and well, the moratorium issue has already been stated above.

According to a research conducted by ICRA, if MFIs are not provided a cushion to defer their payments to the lenders -mainly banks and NBFCs- their liquidity coverage would fall below 1, as can be seen in the table below.

Table 1, source: ICRA

The much awaited, Rs. 50,000 Crore TLTRO which has been provided by the RBI is yet to prove its worth as the central bank isn’t essentially lending directly to NBFCs and MFIs but rather relying on banks to do so. As events unfold, it is being revealed how the banks are reacting to the second version of TLTRO. The first tranche of the offer by RBI has received bids worth Rs. 12850 Crore, which is only 50% of the Rs. 25000 crores. Below is a snapshot of the same.

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Chart 1, source: Edelweiss

Private sector banks have stayed completely away from the bids. Banks are currently maintaining a united goal of sticking to their existing loan portfolio and staying away from fresh exposures, which might increase their NPAs. The risk aversion of banks can be clearly seen as they are parking more than Rs. 7 trillion liquidity surpluses with the RBI even after a 115-basis point reduction in reverse repo rate, but are shying away from extending credit to the shadow banking sector. This is partly because banks are facing difficulties to find investment grade paper for categories of NBFCs under Rs. 500 crore and would be willing to lend more if no such category restriction was mandated. However, removing these restrictions will defeat the whole purpose of lending to the not-so-big NBFCs. We are still yet to see how the RBI’s measure of extending Rs. 25,000 crores to NABARD, Rs. 15,000 crores to SIDBI and Rs. 10,000 crores to NHB will play its cards in meeting their sectoral needs. In order for SIDBI to grant loans, there are two set criteria: a minimum investment grade of BBB is required as on 31st March, and the loan needs to be repaid in 90 days. These two criteria will automatically remove a good number of MFIs from the eligibility list. According to a recent report by the Micro Finance Institutions Network (MFIN), only 60% of the 52 MFIs in the country have an investment grade rating (BBB or above). Additionally, only 23 MFIs are eligible for the refinancing offered by NABARD. The Financial sector is a sector, which is indispensable to save both the lives and livelihoods of the citizens of India. With the kind of problems stated above, if the remaining measures by the central bank prove tepid as well, it is clear that the RBI would have to find a way to directly step in to provide relief to NBFCs and MFIs. One should not forget that the country was witnessing a slowdown much before the pandemic struck, hence all efforts should be directed towards not entering the post-lockdown in a worse (if not better) condition than the country was in before the lockdown. A healthy and smooth functioning of the financial sector is imperative for India to achieve this goal.

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Current state of Indian Economy By: Rahul V (IIM Kozhikode) The decline in real output and profit before tax for non-finance companies indicates that the Indian economy is in depression. When we account for positive inflation, then real sales output growth will be even less. This can be attributed to multiple industries. Just like the 2008 crisis, there is a slump in net sales and PBT. Both of the times the industries which got most affected were manufacturing and mining. But in 2008, the dip was countered by the booming IT and Services industry which helped the Indian economy to register positive net sales and PBT by December 2009. But in the current scenario due to automation, trade war and protectionist policies, the service industry is also facing the heat.

Financial performance of listed non-finance companies 100

50

80

40

60

30

40 20

20

0

10

-20

0

-40

-10

-80

-20

Jun 03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

-60

PBT

Net sales

In December 2019, producers faced lower inflation (WPI = 1.1% growth) compared to the consumers (CPI = 5.8% growth). The difference is inflation rates supposed to benefit corporations who are involved in a B2C Business, but the majority of the transactions in India are B2B thus, the cost is more than benefit for the Indian economy as a whole.

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Investments in Indian Capital Market (USD Million) 6,000.00

2,500.00

5,000.00

2,000.00

4,000.00

1,500.00

3,000.00

1,000.00

2,000.00

500.00

1,000.00

0.00

0.00

-500.00

-1,000.00

-1,000.00

-2,000.00

-1,500.00

-3,000.00

-2,000.00

Equity

Debt

Nifty 50 falls by 6.4% in February as compared to a 1.7 % fall in January. The market saw a jittery trend before and after the announcement of Union Budget. When the Nifty 50 index started to recover by midFebruary, the news about coronavirus spreading fast broke out across the globe. Foreign portfolio investors in no time pressed the panic button which resulted in Nifty 50 decreasing to 11,202 by the end of February.

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Middle eastern cartel, which comprises OPEC, US and Russia, controls the majority of oil extraction. Due to coronavirus, many industries have shutdown which reduces the demand for oil.

Thus, OPEC decided to cut back on production so that prices remain stable. But Russia pulled out of the talk and ever since then there has been a continuous decline in crude oil prices.

OPEC is selling oil at deep discounts so that Russia could not sustain such low market prices and thus forced to agree to the terms of OPEC. India will greatly benefit from these low prices as we import 84% of crude oil. In the current pandemic situation, the government might use this profit to stimulate the economy and reduce the government's current account deficit instead of passing the reduced crude oil prices to end consumers.

Recently rupee touched an all-time low of 75 against the US dollar. This is attributed to pulling out $10 billion worth of investments from Indian shares and debt securities. RBI also disappointed the markets by not cutting down the interest rates and this situation worsened when the Fed and many central banks across the globe reduced their interest rates. This is also an indirect signal stating that the global economy is contracting and, thus central banks around the world are trying to stimulate growth through low-interest rates. The majority of the rate cuts were in March when the corona was declared as a global pandemic and there was serious lockdown across Europe, Asia and the American continent.

An increase in the gold price was the result of the corona outbreak hitting the stock market. Investors across the globe pulled their money out of the stock market and purchasing this yellow metal as a safety bet. Central banks of Turkey and Russia are also expanding their gold reserves. Since gold is a safe haven shield, so central banks across the globe will increase their gold reserves in an environment of global uncertainty.

Impact on Indian Manufacturing sector due to Coronavirus Trade between India and China which includes the Hong Kong area, amounts to around $ 115 billion in 2019.

Key commodities imported from china include electronics, consumer durables, pharma drugs intermediaries and auto components. China accounts for 18% of India’s total imports only next to the middle east which amounts to 24%. Top three manufacturing sectors which are facing the burden of component shortage due to Chinese factory shutdown are, Auto Components: 30% of the tyre imports and 18% of automobile components are imported from China. But India has sufficient inventory to sustain in the short term. It is very difficult for domestic auto component manufacturers to meet the supply void created by the coronavirus.

Consumer Durables: India imports around 45% of the consumer durable components and completely built consumer durables from china. Industry experts are expecting the prices to go up from April 2020, but the domestic assembly plants have sufficient safety inventory stock to meet the demand till Q4 of F20.

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Electronics: India imports around 67% of the electronic components from China. It is very difficult for any firm to meet such high-level demand only through safety stock inventory. Soon people can expect the prices of the mobile handset to rise. The majority of the electronics components and semiconductors are manufactured in Japan, South Korea and Germany. Co-incidentally all these countries are also facing the burden of Corona Virus. Since these components require complex manufacturing techniques, it is not possible for India or any other country to manufacture them domestically.

Overall, the credit profiles of the firms in industries such as automotive, pharma, electronics, consumer durables, and diamonds are expected to go down if the disruption in the supply from china goes beyond April.

The good news is that the impact of the outbreak is said to reduce from the start of the summer since it is difficult for the virus to sustain in high temperatures. While this is just anticipation from the medical community but the manufacturing industry in India has a lot of lessons to take home after this outbreak.

Latest GDP forecast of the Indian economy has been revised down to 1.9% (IMF Report). But this time it's not only India, the global economic growth also revised down to 1.25%. However, this estimate assumes that soon coronavirus will be bought under control just like SARS. Already majority of events across India have been called off which impacts the local economy. Day to day paid labors are feeling the heat since their livelihood is under big problem as they do not have the financial savings to sustain this pandemic. It is high time that the government takes the necessary step to survive this pandemic without pushing any section of people under poverty. After this pandemic, the government should also take resilient measures for future since the virus outbreak like corona can also be seasonal.

Sources: https://www.crisil.com/ https://www.portal.euromonitor.com/ https://economicoutlook.cmie.com/

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Can India become a global manufacturing capital?

By: Ananth Narayanan (IIM Bangalore) The story of India’s manufacturing sector is a tale of missed opportunities. Soon after independence we chose the unfortunate path of a Soviet model for economic growth. The Soviet model was all about extracting resources from the agricultural sector and using it to drive industrial growth. It worked well for a time in USSR because they had agricultural surpluses. Agriculture in India, on the other hand, had been bled bone dry by 200 years of systematic colonial exploitation. This brought down what was until the year 1815, the most prosperous country in the world to an impoverished and illiterate nation with an average life expectancy of 32 in 1947 The effects of colonialism were felt in every single sector of the economy and manufacturing was no different. The total drain of wealth from the subcontinent to Britain is estimated to be at least $71 trillion.1 India was thus the world leader in 1815 accounting for roughly 25% of the world GDP and there is no reason why we can’t take our economy back to where it was.

India’s share of services sector in its GDP is greater than 55%.2 It is very evident that such a disproportionately big service sector exists in no other country in the world. It points to deep systemic issues in our development policies, especially with respect to agriculture and industry. We know very well that agriculture was and continues to be a laggard with no investment or attention to really drive its growth. But, for the purpose of this article, let’s focus on the manufacturing sector and start with by comparing ourselves with our neighbour, China and see what lessons can be learnt.

Export oriented manufacturing: The Chinese example!

We all know the Chinese story of how China with its cheap labour started importing semi-processed goods from the East Asian manufacturers of Japan, Taiwan, South Korea and assembled these into finished products which were then exported all over the world. It was simple economics at work. The labour cost had become high in the East Asian countries, therefore the assembling of products got outsourced to coastal China, and China exported it to Europe and the US, in the process running a large trade surplus with the West and an equally big deficit with East Asia. Today due to the fallacious one-child policy of earlier Chinese regimes, China is rapidly ageing with an average Chinese now being 35 years old.3 Labour rates in China are therefore shooting up and it no longer enjoys the same advantage it did a few years ago. This is the perfect opportunity for India to step into value added, export-oriented manufacturing, especially in sectors that are being vacated

by China like textile, footwear, electronics assembly etc. Unfortunately, we need to work on our infrastructure for this to come to fruition. The average turnaround time for a large container ship in Hong Kong is 6 hours, whereas in India it is upwards of 3 days.4 With such shabby infrastructure, our operations can never be competitive at a global scale.

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Investment in Infrastructure: At the time of Independence, India had the fourth-largest railway system in the world far ahead of China.5 The benefits of this can be judged by comparing the number of famines averted post-Independence in both India and China. Till 2010, the Chinese never invested much in railway infrastructure, but this has changed rapidly since then. In infrastructure overall be it ports, railways and roads, India is a laggard compared to many other places in the world. Thus, it is imperative that we focus on infrastructure related capital spending in our budgets, if we hope to become a manufacturing powerhouse. Before we move on to labour and capital availability, we must realize that no amount of factors of production will make India a manufacturing capital, unless we have the infrastructural backbone and that should primarily be driven by the government.

Labour and Capital: The average age of an Indian is 25 years compared to China’s 35 and Japan’s 45.6 We add more than 1 million people to the labour force every few months. A labour pool of this magnitude would be the envy of the world if only they had the right skills that would enable them to take up highly productive jobs. No other country in the world has the kind of demographic dividend possibility as India does over the next 20 years. Thus labour is our key strength. Our policy makers do not seem to understand this. The focus has always been unfortunately on capital intensive businesses whereas we are a labour surplus country. We have not been playing to our strengths. To overcome this, education and skill development along with investments in healthcare should be the number 2 priority of the government after infrastructure. An analysis of sector-wise ICORs (Incremental Capital Output Ratios) clearly tells us that sectors such as steel, aluminium, petrochemicals are highly capitaland energy- intensive and for one unit of extra output you need to deploy a lot of capital. On the other hand the sectors of agriculture and services like education and healthcare are low ICOR sectors and labour intensive.

Thus, focusing on these services will not only boost GDP (because of a low ICOR), employ more people, but also provide you with a healthy and skilled workforce.

In India, the government also seems to be running after FDI indiscriminately. We need to realize that India is an economy of savers. Our domestic household savings were at 40% at one point of time as a proportion to the GDP. It is a simple rule in macroeconomics that the GDP growth rate of a country is [Savings(as a % of GDP)]/(Avg. ICOR for the overall economy). At savings of 40% GDP and an overall ICOR of 4, India can achieve 10% growth rate in GDP. But unfortunately, the domestic savings have been consistently falling and has hit roughly 26%, since very little attention or incentive has been given to households over the years.7 FDI has never been a big driver of growth for the economy. Thus, a citizen friendly policy like abolishing personal income tax and higher rates of return on savings can promote more investment in India’s industry (where the cost of capital in the informal markets can be 20-30% a year!).8 Thus our households are competent enough to provide all the necessary capital that we need to create a robust manufacturing industry, if only they are tapped into with the right policies.

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Innovation – the holy grail: Lastly, we come to the most important aspect to be focused on if we are to ever become a superpower, in addition to the manufacturing capital of the world – and that is innovation. We already saw how we have enough resources like labour and capital within the country and how they can be tapped and be enabled by the right infrastructure. Going back to basic economics, we know of something called the law of diminishing returns – that after a point, the output of any economy cannot be increased by merely adding more labour or more capital – the growth curve saturates! The only way to break-out of this is to move to a higher curve and that is driven by innovation. Thus we can be imitators of technology and grow up to a point but for long-term sustained growth in all sectors including manufacturing would require us to focus on making India the innovation capital of the world. We know that we can do it because all over the world including in the Silicon Valley it is Indians who are driving innovations globally. Perhaps favourable R&D policies like allowing companies certain tax breaks for R&D and further government spending in promoting research would be the only way India can retain its position at the top of the world, once we get there.

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The Indian Financial system meltdown-It’s not just the coronavirus By: Nishant Kumar Satyam & Vasu Golyan (IIM Indore)

For the first time since 2009, circuit-breakers were applied in both the NSE and the BSE, to prevent the stock markets from falling further. A circuit breaker is triggered when the indices (or individual stocks) rapidlydecline due to panic-induced selling by market participants, and they are designed to stop any further trades from taking place. This was the second-time in two weeks, when the circuit-breakers took effect since the market had fallen more than 10% in a single trading session, on both March-13 & March-23. The recent market meltdowns observed across the world, be it in the US Dow Jones or the Indian stock exchanges, has been widely attributed to the COVID-19 pandemic.

Suspension of economic-activities globally through government-enforced lockdowns, investor-uncertainty, rumor-induced panic-behavior and herd-behavior in general, are held responsible for much of the bloodbath witnessed on the bourses. However, certain economic-indicators had already signaled that such a meltdown was evident. To the surprise of many, sound economic and financial theory had already predicted the downward trend of the Indian markets witnessed since late February.

Let us take a look at what those indicators were, and how we refused to pay heed to these rather apparent writings on the wall.

The Inverted Yield Curve This global-indicator has a track record of predicting recessions with a 100% accuracy rate. This phenomenon has predicted recessions 11-out-of-11 times and is a sure-shot indicator of upcoming turbulent times in the short-to-medium term.

To understand this phenomenon, we first need to understand what bonds are. A bond is a fixed income instrument, in which individuals lend out money, at a fixed rate of return, for a defined period. At the end of the period, i.e. on the maturity of the bond, the investor gets back the original-amount, plus the promised rateof-return, known as the yield on the bond. Yield curves are usually based on US treasury bonds, since they are considered to be the safest out there, and preferred by a large number of people. Traditionally, long-term bonds have a higher yield than short-term bonds, simply because the money is locked-in for a longer-period. (See figure 1)

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1: This is what a traditional yield curve looks like, signifying higher returns with increase in duration of the bond.

2. This is what an inverted yield curve looks like. It shows that short term bonds yield more than long-term ones.

This phenomenon occurs when exists an environment of high uncertainty amongst investors regarding the future, i.e. they are not sure if their bonds would be repaid in the long-term. As a reaction to this perceived sense of volatility, investors start selling long-term bonds and park their money in short-term US government bonds/US treasury bonds. From here, it’s basic supply-demand at play; the demand for short-term bonds increases, pushing up their yields, whereas, an over-supply of long-term bonds pushes down their return. It is symbolic of investors losing faith even in the safest of assets i.e. the US treasury bonds, and highlights the uncertain environment for mid-to-long term investments. Such a situation leads to an inverted yield curve.

(See figure 2) The yield-curve inverted in both August 2019, and February 2020, yet investors, worldwide, failed to pay heed to such a critical macroeconomic indicator.

The Market Cap-to-GDP Ratio Also known as the "Buffet Indicator", after its inventor, the legendary value-investor - Warren Buffet, it is a rough measure of the value of a country's stock market. It is precisely what it sounds like - a ratio of the total market capitalization of a country's stock exchange to that country's GDP.

3: Source: Investopedia

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The value of a country's share market is assessed through the ratio, i.e. when the buffet indicator is below 75%, it is said to be modestly undervalued. At a range of 75%-90%, it is considered to be at fair-value, or slightly expensive. However, debate still exists regarding the appropriate range of values to declare a market undervalued or fairly priced. Yet, it is universally agreed that the value converges to its long-term average of around 70-75%. Since the past two-years, the value for the Indian market has stayed in the high-80s, signifying a slightly overvalued-market. And with the GDP growth numbers continuously deteriorating since the beginning of 2019, it was evident that the GDP numbers aren't going to shoot. Thus, then the only way the Market cap-to-GDP ratio could revert to its long-term-mean in the coming years would be a fall in the marketcap of the Indian stock exchange, i.e. a bearish market.

Rational economic theory had predicted the current scenario, yet investors choose to ignore such signs blatantly.

The P/E Ratio The Price-Earnings ratio or the P/E ratio is a commonly used valuation ratio, which in layman terms, states how much an investor is willing to pay for a stock of the company, per dollar of company’s earnings.

Now a high P/E ratio can be received positively as well as negatively by the investors. A high P/E ratio usually entails the following indications for the company: • Long-term expected growth prospects • Competitive Advantage to allow sustained profitability • Proper Capital Allocation and Transparent & Fair Governance • Sustainable and scalable profitability A high P/E ratio is generally accepted as an indicator of good performance in the market, only if there exists supporting evidence for the occurrence of all the above aspects; but if the market displays divergence from the above factors, then a high P/E ratio hints towards over-valuation of the stock. And history shows that an unchecked high P/E ratio is a recipe for disaster. It must be noted, that the Sensex P/E has exceeded 26x just three times in the last 24 years: • April 2000, following which there was the dotcom burst and the Sensex fell by 40%.

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• •

December 2007, following which was the global financial crisis; the Sensex fell by 56%.

The most recent being in January 2020, following which the Sensex fell by nearly 40%.

Hence, it is evident that attributing the entire blame of the crash to just the pandemic is unfair. Historically, a P/E ratio north of 23x has signaled over-valuation of the underlying market, and such high valuations have seldom been sustained. The ratio has always reverted back to its long-term mean in the low 20s. The market indicators had persistently given out warnings; Rationally, taking account of the unsustainable high-valuations, people should have exited, and the market would have corrected itself, in due time.

The P/B Ratio The Price-to-Book Ratio, or more commonly known as the P/B ratio, is equal to a company’s share price divided by its book value per share. It is a value ratio showing ‘how many times a company’s stock is trading per share compared to the company’s book value per share’, and gives an indication of how much shareholders are paying for the net assets of a company.

Now, a low P/B ratio shows the market sentiment towards the company earning poor or negative returns or its assets’ value being overstated. A highe PB ratio shows belief in the company’s ability to create more value out of its current assets but can also be seen as the risk of the stock being overvalued. Things get interesting when the P/B ratio and the Return on Equities (RoE) start diverging. RoE indicates how much profit a company generates from shareholders' equity.

If a market;s overall P/B ratio is growing so should the RoE and vice-versa. Overvalued growth markets frequently show a combination of low RoE and high P/B ratios.

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The graph below shows the performance of the P/B ratio for NIFTY 50 in the January-February 2020 period to be at an all-time high, which could be an indication that the market was performing well, right?

4: Image Data Source: https://tradingeconomics.com/india/stock-market But on the contrary, a research report by the Business Standard states that “the RoE for BSE 500 companies has been edging lower ever since the global financial crisis of 2008-09 and stands at 9.5 per cent in FY19, lowest in the last 16 years.” - The red flag was up, and there were clear signs of divergence between PB Ratio & companies’ RoE, but no corrective measures were taken. The levels of P/B ratios witnessed since 2019, which were well north of 3x, and way above the long-term average of 2.6x, had constantly pointed out that these assets had been overpriced beyond-measure. Timely rational measures would have led to a correction in the overvalued nature of these stocks, correcting the PB ratio of the market, but the faith investors had in the market was unshakable.

Why did the investors ignore such indicators?

Despite strong global warnings as well as the slowing domestic economy, investors, both domestic and foreign, continued to pour in money into the Indian stock markets, pushing valuations to unsustainable levels. Multiple policy changes and expectations can explain this herd behaviour of investors. Since the late 2010s, both corporate-earnings and private-investment had been lagging behind the pace of growth, of the overalleconomy. An eventual catch-up was expected soon, to be reflected in terms of increased corporate-profits, in the form of a higher Earnings-per-share (EPS)—this which would have cooled down valuations to a sustainable-level. Additionally, the recent cuts in the corporate tax-rate, down to 22% from 30% for existing companies and to 15% from 25%, for new manufacturing industries, made India a country with one of the lowest corporate tax rates, amongst all major economies. Thus, not only would a lower tax-rate be reflected in terms of an increase in profits but also attract more MNCs to set up their businesses in India, increasing foreign investment. Together, these factors painted an extremely rosy picture of the Indian stock market. This apparent

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“promise of good times to come” nudged investors of all sorts, ranging from FIIs, to domestic funds as well as private individuals, to continue having a bullish-view of the market, when a downturn was clearly evident.

Concluding Notes In conclusion, through the performance of these four fundamental-KPIs of the market, we can conclusively say that COVID-19 pandemic, financially, is probably “the worst second once-in-a-lifetime” for any millennial, but it surely isn’t the big-bad, that can be blamed for the Crash of 2020. Suspension of economic activity did take a heavy toll, the cost of health, productivity and the consequent fiscal deficits do play an important role in affecting the market sentiment, the panic and the dismal hope about the “After Corona World” had its fair share in shooting down expectations, but still, still this crash was not completely out-of-the-blue.

The red-flags were all there, but people chose to believe in what can now be only termed as a market cliché, “This time, it’s different.”

There’s no point in expecting things to turn out differently by the sheer force of will, but there’s merit in learning from this incident - a simple learning, that financial fundamentals do work, and financial theory does live up to its name. Maybe next time, the market and its investors will be more rational.

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Increasing Anti-Globalization sentiment in Larger Economies of the world By: Baibhav Kr. Singh & Shweta Sachdeva (IIM Udaipur) Everything in economics is cyclic in nature, be it inflation, unemployment rate or interest rate; they all have varying frequency and wavelength. When we discuss globalization the first phase was between 1870-1914, second between 1944-1971, the third era started in 1989 and continues to date, fortunately. And, history depicts how we have experienced extensive benefits during these periods.

Now, at the time when we are discussing the eventuality of a globally connected society and the concept of global citizen, a trend of anti-globalization is in motion specifically in larger economies. In the following segments, we will discuss on different effects of such protectionist arguments on different factors of the macroeconomic condition of a country such as Trade, Monitory and Human Capital.

Anti-globalisation protesters in Seattle, 1999. Photograph: Eric Draper/AP From an economic perspective, this sentiment will have an adverse effect on the trade viz-a-viz nation’s GDP growth. Adam Smith, The Father of Economics in his 1776 classic argument mentioned the following and we quote” What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

So, a free economy is essential for a nation’s growth both in goods and services market and in the technological sphere as it makes them wary of being obsolete in the near future. By opening its trade, a nation can achieve production efficiency and a higher standard of living with its product having competitive advantages. We have historical data to support the theory also: Japan during the 1850s, South Korea in the 1970s, Vietnam and India in the 1990s. The impact of liberalisation on India which was basically intended to finish the licence raj but had manifold benefits. Let’s look at some statistics, Indian GDP in 1974-75 was 74930 crores (current prices, 2004-05 series) which rises to 613528 crores in 40 years i.e. in 1990-91 which is 718.80 % growth in 15 years

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but after liberalization from 1990-91 to 2013-14 it is grown to 10472807 crores (same parameters as previous) which are 1606.98 % in same 15 years.

Now if we examine the monitory capital of a country, one of the critical criteria is its foreign reserve, and protectionist approach is bound to hamper the net export, and net import quantity of a country be it goods or services, which ultimately projects as a below per exchange rate and downward pressure on foreign reserve.

For larger consumption-driven economies it can create havoc due to supply demand mismatch resulting in an upward spike in inflation and real interest rate. In the Indian context, forex reserves in India post liberalisation grew to $398.12 bn in 2019 from mare $5.8 bn dollars in 1991, (6764.13%). The equity market tells the same story as the 30-share index was around 1000 level, but in the following year, it touches 4000 marks and currently it is 36671.43 which in turns is a growth of 3567.14%. In 1991 the service sector was contributing 42.6% to GDP, and currently, it is 31% at the same time an agricultural contribution has taken a dip from 27.6% to 17.32 %.

The third component of the economy is its human capital. By reducing the injection of foreign human resource, one can plan to achieve more employment in the country, but if we dig deep, we will, in fact, observe a completely different scenario. Many developing countries can benefit from the adverse selection of large developed economies as it can help them tackle the so-called ‘Brain-drain’ issue, improving their overall quality of human capital. Adversely it depletes the human resource of the developed countries which till now enjoyed a large concentration of global intelligence at their disposal.

With all this economic adversity attached to it, it is quite fascinating that how leaders of world power house like the US, Russia, Turkey are blaming foreign forces for a national crisis. To cite the reasons behind such a decision can be credited to the mainstream ascent of imbalance, the strength of dictatorship, the diligence of prejudice and xenophobia, the decay of the open circle in the computerized period, and the long haul decrease in trust in governments and elites. They have reasoned that more globalization has resulted in complex issues in domestic societies pertaining to an interlinked system with international governance. This, in turn, has given rise to institutional stagnation and global management gridlock. 2008 worldwide financial meltdown and its aftershock in the large economies has been cited as one of the many examples of such gridlocks.

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Another factor that must be considered is the global political turmoil that has ravaged the middle east and African countries creating millions of homeless refugees. Large economies are bearing the pressure for that.

Thus, we see events like Brexit, ban on visas of many middle eastern countries by the USA and sealing of international borders by different European countries. These altogether have affected global trade.

REUTERS/Luke MacGregor

These political unrests have also contributed to the gridlock by creating fear across the minds of citizens who in turn seek to reassert indigenous authority. Thus, handing over the mantle to the populist and nationalist leaders with propaganda to lead their respective countries to previous high’s by taking back the “control” from foreign forces and consequences are tragically adverse. By denying the international collaboration and global acceptance, they are aggravating the very problem which they are supposed to find constructive and refined solutions.

To conclude, we would like to emphasize the fact that in today’s connected world it is virtually impossible for a nation, let alone an economy, to grow in segregation or desolation. But, it is also apparent that we can’t judge the depth of the globalization problem by based on a few countries. So, as the mutual dependency between the nations has prevailed from time immemorial and will continue to do so, it is not the isolation, but the proper administration of globalization in a comprehensive facet will guide the large economies to cover the lost grounds and claim its past glory.

References: 1gregory_mankiw_macroeconomics_9th_edition.pdf

Title Image: http://www.assignmentpoint.com/arts/sociology/anti-globalization-movement.html

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CORONABONDS: Road to solidarity or Disharmony?

By: Anoushka Paliwal & Sushri Padhi (Shri Ram College of Commerce) The world is grappling with a deadly microscopic enemy right now, trying to understand how to live with the threat posed by the virus while the economies are at a standstill and millions of lives hanging by a thread. No one is immune to this so-called black swan of 2020, not even the worlds' most vibrant economies. In Eurozone, as the insidious threat lurks around, governments are doing everything in their power to keep the businesses buoyant as the demand-supply chains are grievously impacted.

Let's not forget that this lavish generosity of government requires money and soon they will run out of it.

Perforce they will have to resort to borrowings which in turn has a cost of its own. In the upcoming unknown future, this will create a havoc in already debt-stricken countries like Spain and Italy as they don't have a financial cushion, unlike the richer countries of European Union (EU), to fall on to.

To address the economic downturn, several European Union (EU) members have come up with the proposition of Coronabonds in which joint debt will be raised and the money will be directed to the member(s) who needs it. 19 members of the EU, i.e. the Eurozone, will be jointly liable for that debt. The funds will be mutualized and raised from the European Investment Bank at a low-interest rate. This brings us to the question why not issue bonds individually? Well, while it is manageable for strong economies, like Germany, to raise funds at a low-interest rate but the same cannot be said for the weaker economies of EU as no prudent investor would like to park his money in a bond issued by a highly indebted country, like Italy or Spain, at a low-interest rate as higher the risk, higher the interest rate. Hence, the joint debt idea proposed as Coronabonds will lower the borrowing costs by sharing the debt portfolio between countries having striking differences in their economic outlooks.

However, unlike the three altruistic musketeers who help each other no matter what; the Frugal Four (Germany, Netherlands, Austria, and Finland) are not in favour of joint debt as they believe that it is the

28 | P a g e individual responsibility of EU member states to keep their finances in order. After all, no country, especially from the political point of view, wants their taxpayers footing the bill for some fiscally irresponsible member.

No one can blame the Frugal Four, after all, why would they want to be punished for the fiscal mismanagement of other countries who did not save for such rainy days. Of course, there is the solidarity card and the fact that the US dollar is outperforming all major currencies to root for Coronabonds .

How did dollar come into all of this? For starters, lack of united front by the Eurogroup, since the proposition of coronabonds, has sent the investors out of the Italian bonds to increase their spread in USD bonds. In fact even before this Corona fiasco, dollar threat was always lurking around in the bond markets of Europe. In the eyes of investors, euro was never in dollar's league. Unlike the currency, bond markets are not unified in EU. Each country has its bond market bearing different levels of risk. Even if one country's market is not performing well, it affects all other euro members as the currency becomes very volatile and no investor likes that. For instance, the European Debt Crisis that began in Greece in 2009, was the sole reason why liquidity vanished from Europe and forced the investors to join the other side – US market.

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There is no doubt that the unification of the bond market in Europe will bring stability and more funds but the major obstacle, apart from the logistics for implementation, remains the contradicting beliefs between the North and South European Nations. It goes without saying that if frugal four continues to oppose the fiscal response then the remaining countries might want them to part ways with the EU after all if all of them are in the same boat and the iceberg hits them, then they should all come together for a united European response.

The problem does not end here. It does sound unfeasible to launch such extraordinary measures in such short notice as each country will have to make amends in their laws to support and at the same time protect themselves from possible loopholes present in this proposed mechanism.

This situation is like a tangled conundrum and the devil's in the differences. While some countries firmly believe that these bonds are a symbol of cohesion and financial integration for the Eurozone, others find these breaching the very founding principle of the Eurozone, that every country is responsible for its wellbeing. Now the question for you is ‘would you like to confide your credit card details with someone whose expenses you can’t control, for the possibility of greater good for everyone around you?’

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Whether bailout of banks is the only solution?

By: Yashika Mehta & Tanvi Sawant (IIM Banglore)

Yes Bank, PMC Bank – do these names ring a bell?

While PMC bank could fail, government stepped in to bail out Yes Bank. There was a limit being placed on withdrawal and a lock-in period has been declared for its shares. RBI had taken control of it. Currently, SBI, LIC and other investors have invested in its shares. The new Board constituted is exploring ays to revive the bank.

While this story is not new for India, it’s time to revisit a few questions - what has caused the current failure? Is it unique? What will be its future? Will the bank survive?

What it fails?

Yes Bank Stock price 300 250 200 150 100 50 0

Why a bailout is required?

Most of the banks have failed due to the reasons mentioned in the images alongside. Poor corporate governance and lack of individual integrity of employees and / or top management are two of the most dominant reasons. Other reasons are poor /inadequate credit evaluation and lack of regulatory framework.

The desire to make short term gains translates in the form of bad loans, frauds, etc. and comes at the cost of long run solvency of banks. While the beneficiaries of such an act amass massive profits put into peril the very existence of the banks.

Stock price

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Bailout and its fall out: Failure of banks leads to loss of trust in the financial system. People lose their savings and thus, consumption and investment both are affected leading to slow down in economy.

During the sub-prime crisis, the bailout cost $ 498 billion. While Fannie Mae and Freddie Mac were bailed out, Lehman could collapse.

The natural consequence of failure of Lehman erupted in the form of global recession.

In 1969, one of the reasons for the nationalisation of banks was to create trust in the banking system and thus, encourage mobilisation of savings. However, while nationalisation added the trust required in the banking system, issues such as inefficiencies and fraud cropped up. One of the recent examples of the same can be the Nirav Modi Scam at PNB. On one hand, bailouts are necessary; On the other hand, repeated bailing out by government creates a perception of banks being too big to fail. This is backed by an expectation that in case of distress, the government would come to rescue and support these banks. Natural exploitation of it is that the bankers offer loans with a lax attitude and banks suffer from moral hazard issues. If bad debt write-offs is not difficult, banks venture into giving risky loans and become complacent about taking risks.

Current situation: The NPAs in the banking sector increased at a rapid pace post the global financial crisis during the period from 2010 to 2013. The Price to Book multiple declines from 1.1 in 2011 to 0.7 in 2018, trailing the global average for the fourth consecutive year

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The government passed Insolvency and Bankruptcy Code in 2016 to put a halt to evergreening of loans. 12 banks were brought under Prompt Corrective Action (PCA). 5 banks were merged with SBI and several other mergers are proposed to revive the banking sector. Besides, government declared recapitalisation of banks under the Indradhanush Scheme to ensure that banks recover quickly.

However, at present, the situation has worsened due to the ongoing crisis in the NBFC sector. The last one year has seen drastic decline in credit from ~23% to ~7%. IL&FS, PNB Scam, Videocon scam, and now Yes Bank are cases that have shaken the base and are currently challenging the resilience of financial sector.

Economists are proposing setting up bad banks and asset reconstruction companies to ensure that banks can focus on core operations and are not bothered about their bad loans.

The chart below quickly summarizes the current scenario:

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Bank bailouts and involvement of taxpayers’ money Bank failures can erode public trust in the system, have a contagious effect and cripple the entire economy.

It affects depositors, shareholders' returns, and investments. Government steps in and bails out banks to prevent the cascading effect. In India, government steps in either directly by infusing funds, for e.g. recapitalization of banks or indirectly by asking SBI or LIC to step in and make investments in such banks.

Recapitalisation can be done from 3 sources: government revenue (including taxes) or through higher fiscal deficits or through monetisation. In either case, the taxpayer suffers in the following ways:

In India, there have been successful bailouts also. For e.g. in 2002, the Indian Government bailed out Unit Trust of India by infusing over Rs. 14,500 crores. and repaid the investors that had invested in UTI. After 15 years, the government can recover its stake only by selling its partial stake in Axis Bank. However, what worked then need not work now. Currently the government doesn’t have required amount of money that would be needed for a bailout. Our revenue to GDP ratio is ~20%, while debt to GDP is more than 200%.

Despite all this, over the years, what seems to be emerging is that the system cannot avoid bank runs without a substantial expansion of the government guarantee and thus, it is a huge potential cost to the taxpayer.

Alternative solutions To avoid government bailout, some of the alternative solutions are: Bailouts are for temporarily easing out the situation. Rather than bailing out delinquent corporate borrowers and negligent bankers, what we need is not alternate solutions but sustainable solutions – such that situations warranting a bailout do not arise and are guarded and taken care of well in advance.

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Sustainable solutions Sustainable solutions would involve legal and operational reforms. In formulating these reforms, policymakers will also have to address the heightened moral hazard and broadened too big to fail doctrine associated with the bailouts of financial firms. The measures should increase deterrence and facilitate early detection of issues such that banks do not reach a dire stage where a bailout becomes imperative. We need to separate bad luck from bad behaviour. Some of reform areas are as follows:

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Conclusion A long-term sustainable solution means a robust risk assessment, improvement in credit appraisal standard, multi-layered audit system and tighter laws. Stringent regulations, robust credit evaluation, and ethical managers can ensure that there’s no abuse of corporate veil. The government can’t just keep on throwing good money after bad to wash away the sins of few individuals. A sound, robust and resilient banking system, which doesn’t fail - not because there’s bailout but because such situations do not arise - is the need of the day. It is then when we can say our banking system is sufficiently developed for India to sustain a growth rate of 8-9% and become a $5 trillion economy.

References: 1. https://www.learntalkmoney.com/banks-fail-india/ 2. https://www.mic.com/articles/10304/financial-meltdown-101-10-reasons-why-banks-fail 3. https://www.resurgentindia.com/taxpayers-to-cure-paralyzed-indian-banking-industry-aftermenace-of-bad-loans 4. https://www.thedailybeast.com/stop-the-bailout-four-better-alternatives 5. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost 6. Global banking review - McKinsey

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The realm of the Gig Economy: Understanding the new normal By: Bhavana Attarkar (JBIMS) The past decade was to accustom, the next decade would see businesses gearing up. Gig Economy is here to stay! Wait, let me take you to the tour of Gig Economy. The older generation believed that everything around is to be owned or has to be built. There was hardly any concept of shared accessibility. It was in the latest decade that shared economy has jumped in. What comes to your mind when you think about Uber or Ola? You dont need to own a car anymore to travel, just book a cab. We can say that a segment of shared economy is Gig Economy. The services are enabled through technology. The most trending now a days is UrbanClap where the customers can avail the services ranging from beauticians, Electricians, carpenters, plumbers etc. The main pillars of gig economy are the business, Consumers and People.

The dynamics of workforce is changing in the Gig Economy. Indian Economy has a huge labour force in the informal and semi-skilled segment. The gig Economy to a huge extent has introduced them into the formalized workforce. But the question is How? By providing financial support, access to their target market and yes an intensive skills training. A rigorous 80 hours of training is provided at the time of induction to the beauticians at UrbanClap. They are also provided a complete beauty kit before starting the actual business. The transportation giants Ola and Uber provide assistance to their drivers by providing financial support required to buy a cab. The complete employee life cycle must be reassessed for gig contractors from recruitment, training to retention of employees.

The concept of gig economy is that “People come and go”, so the organisations must adapt and quickly move in terms of induction and training of employees. The recruitment process must be faster and adaptable than the organisations currently have. It cannot be lengthy and tedious process. It must move from months to weeks. It is the survival of the fittest, if you do not chase top talent someone else will. On the similar lines training and development must also change. The training and development is usually on an annual basis, but with the short term employment coming into picture these would no longer be valid. Result oriented objectives must be set and acted upon. This would ensure constant conversations between the employee and manager.

In terms of training more individual learning must be focused rather than team. This kind of mindset must be encouraged to enable short term employees learning curve. Also, Gig workers are able to earn more than their counterparts employed in the traditional setups as there are no middlemen involved. All of this contributes to improved earnings, a better lifestyle and respect for gig workers.

Not to be surprised, retention would not be the major focus area in the Gig Economy. An environment and culture must be created that encourages them to “come back”. Retention has taken a new turn. Create an employee experience for the gig workers so that they would talk about it to their peers outside the organisation.

The ride sharing company Grab now accesses and trains its employees from remote location using technology. Inefficiently trained gig workers might tarnish the brand image and therefore must be trained with utmost care. One of the major questions arises is the “investment” on training and development of the gig workers. Anyways they aren’t going to stay in the organisation for a long time. But the researchers have confirmed that it is definitely worth it. One must look at the broader picture in terms of brand image, loyalty, satisfaction and of course productivity. Training them would definitely have huge financial returns in future.

The training must also include the managers communicating the values and mission which the organisation follows. Understanding of processes, tools and culture is of utmost importance for the gig workers.

37 | P a g e Feedback is one of the most powerful tools which can be considered as ongoing training mechanism.

Constructive feedback must be given by managers so that continuous improvement can be made. The contractors must be given the same value and respect which is given to the full-time employees. This would reap benefits in terms of brand equity and loyalty. The growth of Gig Economy is reshaping the dynamics of workforce and the way work is done. Speed and agility are the most important competencies that would be desired in a gig worker. Training for the technological skills would be most important. Organisations have to restructure the learning and development aspects in the Gig Economy.

The major question arises that whether the Gig employees must be trained or not. It is often questioned whether the gig workers should be referred as “external” or “employees” in the organisation. The company at times shows indifference to the training and development needs of the gig workers. The organisations tend to not bother regarding the investment in the gig employees stating that they don’t remain in the organisations for long period of time. Gig workers might work from distant places and at unusual hours. The organisations must utilize the technology for the training needs of gig workers. Investments must be made in the digital platforms and other resources to create a proper learning platform. The rationale must change, the gig workers must be engaged and well utilised. This would ensure that contractual employees add value to the organisation.

Digital Onboarding can be done for gig employees. Even though regular induction program cannot be held for them, proper procedures must be carried for the induction process. The induction program must include the session on policies of the company, the joining formalities, introduction to various departments and certain leadership programs E-learning, Video-learning and gamification is definitely fun. To keep the gig workers more engaged in the system one could have gamification depending upon the other factors. One could educate the gig workers about the mission, values and other important aspects using the video learning or gaming methods.

Use of the AI: Gig workers bring certain specialized skills on the table. Artificial intelligence could be used at our discretion so that proper departments could assigned to them depending upon the needs.

Technology can be used for the apt learning of the gig workers but at the same time it is important to have them integrated into the organisation. This might seem easy but would be challenging since there could be conflict of interests between the regular employees and the contractual workers. The T&D department must look into what would be required to avoid this and integrate the gig workers into the mainstream. So what can be done? The organisations must orient the gig workers about the strategy, values and culture of the organisation. And on the similar lines they must train the regular employees as well so that they could accept the differences and work cordially with the contractual employees of the organisation.

The top talent in the gig workers must have a proper learning curve in the organisation. Learning without any doubt is an excellent driver for engagement and would encourage the top talent to enter into your organisation. To make this change happen the traditional mindset of thinking gig workers as only temporary employees must change. The development of the gig workers must be considered as one of the top priorities by the organisation.

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Discussion on Economic theories with the background of current crisis in Oil and Gas Industry By: Shubha Kanetkar (School of Petroleum Management) National Bureau of Economic Research (NBER) defines crisis as “a significant decline in economic activity for several months reflected in lower GDP, lower individual income, reduce employment levels, reducing industrial production and consumption.”

And evidently, the world is into one.

The energy sector undergoes the Tragedy of Commons, an economic problem where every individual has an incentive to consume a utility at the expense and at the stake of others. This creates a dearth and many needful individuals remain ripped off. However, this paradigm has been challenged by the Covid-19 crises.

The energy sector’s valuation is shrinking to such a degree that it has become the second smallest segment in the entire S&P 500 index, with its weighting down 80% from a decade ago. The most consequential impactof the COVID-19 crisis on the oil and gas sector.

The downfall in the oil prices is due to substantial influences from both the demand and supply side.

Demand for crude oil has fallen all around the world due to this pandemic which has locked down millions of people, closed factories, cut supply chains and reduced transport at home and abroad via trade.

On the supply side, an ironic partnership between OPEC and Russia has turned into a bitter breakup. The obvious war for market share has flooded the world with oil and this has created a glut.

The coronavirus pandemic has caused oil demand to drop so rapidly that the world is running out of room to store barrels. The American oil industry is facing a doomsday scenario with its futures contracts of WTI (West Texas Intermediate) ending in May, and no potential storage space left, the prices have turned negative.

39 | P a g e The world is covered with an air of gloom and implications of all the happenings are huge. Uncertainty, as opposed to mathematical risk is an extensive fact of life. Certainty of foresight is potentially impossible. In India, a country with around 420 people per square km, social distancing is an oxymoron. Adding to this adversity there are more problems like the disruption in wholesale markets, transportation hurdles ravaging the rural economy, millions of daily wage earners running jobless at this point in time, industries crashed, production close to 0%, decreased spending among people and what not. We are breathing in the air of uncertainty with potent grief and the world is hit by recession. So, the locked up and locked out economies pose serious risks like: 1. Major economic and social disruption in nations with fragile democracies.

2. Bankruptcies, unemployment, rural decay, elevated drug use very likely in crude dependent economies.

Rational choice theory states that individuals are prone to make rational calculations which would help them choose rationally correct option that would be aliened to their personal benefits. People tend to choose options which given them greatest benefit and satisfaction given the choices available to them. So cheap crude may cause: 1. Deterrence or delay in the incentive of transition from engines to batteries in vehicles.

2. Vehicle manufacturers might not prioritise higher fuel economy and efficiency.

3. Decline in the interest of recycling plastic as producing new plastic would prove to be cheaper.

The Energy Market is a complex one, there are a lot of stakeholders, different components and plentiful players. As with any free-market, natural laws of supply and demand come in to play, but each is impacted by the components that make up the oil industry, such as refining capability, oil reserves, and foreign affairs.

The demand side consists of millions of us, individually we do not have the power of influencing prices but collectively a lot of it. On the supply side it’s a bit complicated with a number of players fighting for their slice of market share and geopolitics into place. To counterpoise demand and supply seems to me a significant solution. Increase in the demand for crude would strike the balance. But it’s not that easy, demand needs to be created.

Laissez-Faire theory of Behavioural Economics suggests that free market reinforces the balance between supply and demand and considers any type of government intervention as dilapidation in its truest sense.

The past many crisis have shown very clearly that the markets for a number of recently innovated financial instruments do not work well. While the Laissez-Faire theory refutes this, Keynesian theory considers the support of Government in setting up the balance pivotal. It propounds that government should increase demand to boost growth. It can be done so by government pay out in infrastructure, unemployment benefits and education. And the legislative bodies around the globe are partially sticking to it. This theory braces expansionary fiscal policies which use budgetary tools to expand the money supply or cut tax rates.

Even The theory of Monetarism states that supply of money in the economy is the pillar of growth. Economist Milton Friedman suggests on the basis of Quantity theory of Money that government that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. In the current situation the flow of cash has stopped, the economy is bearish. And government will have to interfere to settle this unrest.

Ricardian Equivalence argues the sanctity of debt-financed economy. The theory argues that consumers will save any money they receive in order to pay for the future tax increases they expect to be levied in order to pay off the debt. So, the governments need to cautiously draft policies and orders.

40 | P a g e Things are supposed get better when the industrial (production) sector and the transport sector resumes, the Energy Information Agency confirms that the Industrial sector consumes up to 54% of world’s deliverable energy, the energy consumption of transport sector is between 20-25% depending on the country, but a push from government is required.

Now with the background of Oil and Gas and the proposal of increasing the consumption of different utilities which in a way would increase demand for energy there comes a paradox. There is a thin line of difference between increasing the demand for energy and promoting waste of energy. With almost half of the energy coming from fossil fuels in terms of oil and gas, there is a conscious concern about conservation of environment. With the Paris Agreement, the whole world has joined hands to cease rising temperature of earth and decarbonizing the world. So, the mistake of over-doing Keynesian principles would be intolerable.

The governments have to vigilantly take the world out of crises and people will have to be careful the way they consume fossil fuels.

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Yes Bank to No Bank By: Krishnan Lakshmanaperumal (IFMR GSB) The budgetary situation of Yes Bank Ltd. (the bank) has experienced a consistent decrease generally because of powerlessness of the bank to raise money to address potential advance misfortunes and resultant minimizations, activating conjuring of bond contracts by speculators, and withdrawal of stores. The bank has additionally experienced genuine administration issues and practices in the ongoing years which have prompted consistent decay of the bank. The Reserve Bank has been in steady commitment with the bank's the executives to discover approaches to fortify its monetary record and liquidity. The bank the executives had shown to the Reserve Bank that it was in chats with different financial specialists and they were probably going to be effective. The bank was additionally connected with a hardly any private value firms for investigating chances to inject capital according to the documenting in stock trade dated February 12, 2020.

These speculators held conversations with senior authorities of the Reserve Bank yet for different reasons in the long run didn't mix any capital. Since a bank and market drove restoration is a favored choice over a administrative rebuilding, the Reserve Bank put forth all attempts to encourage such a process and gave sufficient chance to the bank's administration to draw up a valid recovery plan, which didn't emerge.

Meanwhile, the bank was confronting standard surge of liquidity. Subsequent to thinking about these advancements, the Reserve Bank came to the end that without a dependable restoration plan, and out in the open intrigue what's more, the enthusiasm of the bank's investors, it had no other option however to apply to the Focal Government for forcing a ban under area 45 of the Banking Guideline Act, 1949. In like manner, the Central Government has forced ban successful from today.

The Reserve Bank guarantees the contributors of the bank that their advantage will be completely secured and there is no compelling reason to freeze. Regarding the arrangements of the Banking Guideline Act, the Reserve Bank will investigate and draw up a plan in the following not many days for the bank's reproduction or amalgamation and with the endorsement of the Focal Government, set up a similar well before the time of ban of thirty days closes so the contributors are not put to hardship for an extensive stretch of time.

Is it unexpected?

On march 2019 former RBI Deputy Governor R Gandhi as an additional director on its board The RBI action had come after two consecutive years of the bank having been found of under-reporting its stock of NPAs (non performing assets). NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPAs are not only problem for YES bank but also for the recent banking crisis. Finance Minister Nirmala Sitharaman on announced upfront capital infusion of Rs 70,000 crore into public sector banks, a move aimed at boosting lending and improving liquidity situation. Because banking system is the backbone of the economy especially while facing economic slowdowns.

What is the problem?

There is a huge problem in banking and financial systems particularly in banks and NBFCs. It is there in private sector banks and public sector banks and certainly in cooperative banks too. We had seen in the past that how CEOs like Chanda Kochhar in ICICI and shika Sharma in AXIS banks faced governance issues. It is because of such mismanagements by the top managements and CEOs that the entire system remains crisis ridden. Till now there are 14 public banks went bankrupt, the collapse of IL&FS,IDBI bank, PMC bank, Reliance capital , DHFL ALTICO went into a mess and there are more of these kind of mess yet to come out from banking and financial sectors. We also saw huge expose of governance issues in YES bank and finaly

42 | P a g e leading to the exit of rana kapoor . As of March, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore and rising. The system went into a mess because of political interference and middling in the functioning of the banks. And also by the poor regulation and supervision by the regulator RBI. There has been a huge loss in public money in the process. In the last 3 years the government has pumped in over 3.5 lakh crore to recapitalize public sector banks who’s capital got eroded by these kinds of NPAs. The founder rana kapoor had a career in number of foreign banks and then came to India and got license in 2003 he had 26% share in YES bank. Because of the aggressive fund rising and whole sale lending YES bank became 4th largest private bank in India. YES bank said Yes to all the bad boys of Indian banking system ,IL&FS, Dewan Housing, Jet Airways, Cox & Kings, CG Power, Cafe Coffee Day, Altico-name a bad boy of Indian financial services sector and you are likely to find YES Bank as a key lender. Their lending had increased from 55,000 in 2014 to 2, 44,000 lakh crore in 2019.

The whole mess Even the Reserve bank of India had been a mute spectator to an extent, In 2015-16 Yes bank involved in huge corporate and regulatory violations .It had been indulging in lots of reckless lending and there was a manipulation of financial statements. When this issue came into the form Reserve bank did not take any action. But in sep 2018 RBI refused to extend the tenure of Rana Kapoor as a CEO of YES bank and he finally exited in April 2019. Thus reserve bank did not take timely action when it was needed to be taken. As a result of these kinds of malpractices, mismanagement and misconduct of Rana Kapoor a huge damage got done. Today the bank is fighting for survival .The bank’s financial position is precarious, Lack of liquidity, shortage of capital, losses are arising and NPAs arising.

lending in crores 300000 250000 200000 150000 100000 50000 0 2014

2015

2016

2017

2018

2019

Revival plan In its last report of September 2019 YES bank reported a losses of 600 cr and in the financial year 2020 so far there has been a rise of NPAs such that 30,000 worth loans are today questionable. They are unable to rise any further capital to sure up its finances

43 | P a g e even the new CEO desperately trying to raise capital of about 2 Billion dollars but no investor whether domestic or foreign are now willing to invest in the bank with such a precarious position in order to protect the depositors interest and also failure of the bank to come up with a any kind of revival plan.

Finally Reserve bank superseded the board of YES bank by doing that it has put the bank in Moratorium.

This is the first time we are witnessing a large private sector bank going to moratorium for a period of 30 days.

Within 30 days that the reserve bank will come up with revival plan for YES bank that includes some kind of restructuring, amalgamation of the bank or some fund rising such that . Reserve bank rightly says they are doing this in order to protect depositor’s interests. Former CEO of SBI is the in charge of YES bank now.

During this period if you’re a depositor of YES bank you can withdraw maximum of 50,000 rs only from your account in case of extra ordinary circumstances like medical needs or marriage 5,00,000 rs can be withdrawn.

Common man’s expectation In case of YES bank, Depositor’s interest is protected by Reserve bank that will ensure that there is no panic in the banking system. But the shareholders of YES bank facing huge erosion in their wealth. The most important thing is that this is not the end. There could be a lot more hidden NPAs in the banking system.

When a whole body is in need of a treatment in .When there is a clear indication that the entire banking sector needs a severe treatment. No point in treating it as a company specific problem. And this banking sector plays a very important role in current economic slowdown. It’s a very important time for the government to come up with a sector wise revival plan to regain the trust of a common man on the banking system

REFERENCES: 1) Yes bank balance sheet (past10 years) 2) RBI official website 3) Moneycontrol.com 4) Recent articles on Live mint, hindu , business standards …etc

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The saga of negative interest rates By: Sourish Roy (NMIMS, Mumbai)

Prevalent in some of the European countries, Negative Interest Rates means that one needs to pay interest to the bank for their deposits. The adjacent table shows a number of countries in Europe, Middle East and Africa which give negative interest rates on 10 year government bonds :

European countries, namely Germany, France, Netherlands and Switzerland have negative yields and bonds in almost all these countries have gone down over the past year. In Asia, Japan is the only country currently to have a negative interest rates on their yield.

Negative interest rates were seen as an experimental measure after traditional policy options proved ineffective in reviving economies damaged by the 2008 financial crisis and recession. The goal was to mitigate the risk of deflation in the economy and avoid economic distress. The table below shows the countries with zero or negative rates.

First, let us analyse the possible reasons for the negative interest rates in so many countries. The primary reason would be too much liquidity in the system. Institutions and companies would be reluctant to hold too much cash with them in the short term. Therefore, they would be happier to deposit the money at some bank and pay an interest for the same.

Investors may have lesser confidence in other assets like gold, equities, mutual funds due to lesser yields over a period of time. This limits the choices of the investors and the banks can charge an interest fee for depositing the money in the bank.

45 | P a g e People may also believe that the bond yields would become more negative in future. Bond yields have a negative co-relation to the price of the bond. Therefore, the price of a government bond purchased a few years ago has increased to such an extent so as to bring down the yield to a negative figure. Currently, we have around $ 15 trillion negative debt in the world which includes sovereign bonds, corporate bonds and junk bonds(risky asset classes), which means investors would loose money if they hold them till maturity.

People may not want to hold these bonds till maturity due to these speculations.

The other theory states that people may want to save for future consumption. Traditionally, it was believed that consuming today would be better than consumption at a later point of time, which means that to deferring consumption by saving now, we need to have some positive returns. But, due to increased life expectancy, especially in the developed countries, people want to save for their retirement. Thus, consumers are willing to give a return for deferring consumption.

A shift towards negative interest rates would result in unconventional methods of banking as well. Customers would have to pay interest to keep deposits at a bank and the banks would lend to its customers at a negative rate, slightly lower than the interest rates charged from its customers. The difference would typically be the bank spread. This has led to zero mortgage loans in Denmark and a few other countries [So, next time you want to buy a car, you would get paid to take a loan].

There exist a number of problems associated with negative interest rates. Firstly, the direct costs faced by the banks owing to negative interest rates is a big issue which is aggravated by design of the exemption threshold. Negative interest rates have resulted in a direct decline in interest margins, and therefore in a decrease in profitability for the banks. Also, risk based pricing becomes all the more challenging and the prevailing dearth of options for institutional investors is increased further.

Consumers, may, as a result decide to take out the money, altogether, from the bank which would lead to a leakage in the financial system of an economy. In the foreign exchange market, the consumer would try to search for better returns in other geographies which would lead to weakening of the local currency. However, this would not be successful in case the negative interest rates gain worldwide popularity. If more and more central banks use negative rates as a stimulus tool, the policy might ultimately lead to a currency war of competitive devaluations.

Practically, almost all central banks across the world are cutting rates every quarter. This is because of the fact that many developed economies of the world are fearing a slowdown. Thus, to increase growth and inject liquidity into the system, the central bank has to cut rates. Also, in a number of economies, there is a fear about currency war(refer to China devaluing their currency). Thus, many central banks are cutting rates to weaken their local currency so that the exports remain competitive.

All these pose a number of questions in the near future. Such negative interest rates for long periods of time is unprecedented in history and it remains to be seen what the central banks do in case an actual slowdown hits the world economy. In case interest rates are negative throughout the world, the conventional practises of banking would change and would disrupt the industry. We also need to wait to see if the interest rates would become more negative in case liquidity continues to flow. People would start buying bonds at higher prices which would decrease the yields further to more negative levels. In this case, other asset classes including commodities, equities would see a rally in the near future. They would actually correct themselves if the recession becomes a reality.

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